Marketplace
lending
A temporary
phenomenon?
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Foreword 1
Executive summary 2
1. What is marketplace lending? 4
2. Marketplace lending: a disruptive threat or a sustaining innovation? 8
3. The relative economics of marketplace lenders vs banks 11
4. The user experience of marketplace lenders vs banks 23
5. Marketplace lending as an asset class 24
6. The future of marketplace lending 30
7. How should incumbents respond? 32
Conclusion 35
Appendix 36
Endnotes 37
Contacts 40
Foreword
As explored in Deloitte’s Banking disrupted and Payments
disrupted reports, and Deloitte’s The Future of Financial
Services report, produced in collaboration with the World
Economic Forum, a combination of new technology
and regulation is eroding many of the core competitive
advantages that banks have over new market entrants.
These structural threats have arrived at a time when
interest rates are at historic lows, and seem likely to
remain ‘lower for longer’. Combined with an increase
in regulatory capital requirements, these changes are
making the goal of generating returns above the cost of
(more) capital a continuing challenge.
At the same time, customer expectations are changing.
Consumers’ experience of digital in industries such as retail,
accommodation and transport is heightening expectations
for convenience and immediacy. And consumers are
increasingly willing to experiment with new providers, even
for services where trust is required. This is creating ideal
conditions for technology-enabled entrants to challenge
the integrated banking model.
Marketplace lenders (MPLs) are leveraging all of these
trends to attack one of the core profit-generating
activities of commercial banks: lending. The MPL model
is built around modern technology that enables highly-
efficient customer acquisition, approval and servicing
activities within a relatively light-touch regulatory
environment. Most banks’ operating models, by contrast,
include legacy IT expenses, significant regulatory
overheads and the mature collections and recoveries
function that is needed to service an aged book. All these
are factors that add to the average cost of a loan. Many
commentators recognise the significant cost advantage
that this will give MPLs and are highlighting the resultant
disruptive threat that MPLs represent to the traditional
banking business model.
This report is our contribution to this debate. It is
based on extensive research and analysis, including
expert interviews and a survey of consumers and small
businesses, which aim to answer the following questions:
• is marketplace lending a temporary phenomenon? Does
it constitute a disruptive threat to banks’ core lending
and deposit-gathering business? Or is it, instead, a
sustaining innovation, that does not fundamentally
change the financial services landscape but may instead
drive improved performance and pioneer the provision
of credit into previously under-served segments?
• what should (and can) banks do to react to the
emergence of the MPL model?
Our findings suggest that MPLs are unlikely to pose a
threat to banks in the mass market. In the medium term,
however, MPLs are likely to find a series of profitable
niches to exploit, such as borrowing which falls outside
banks’ risk appetite and segments that value speed and
convenience enough to pay a premium (for example
SMEs, particularly in invoice financing, or high-risk
retail borrowers). So while banks cannot afford to be
complacent, they probably have more to gain than to lose
from implementing a strategy of effective collaboration
and partnering with MPLs.
Neil Tomlinson
Head of UK Banking
Marketplace lenders (MPLs) are leveraging
all of these trends to attack one of the core
profit-generating activities of commercial
banks: lending.
Fo
rew
o
rd
1Marketplace lending | A temporary phenomenon?
Executive summary
Marketplace lenders (MPLs) have recently gained
prominence following rapid growth in markets like
the UK, the US and China. This growth, along with an
apparent investor appetite to provide them with equity
funding and use them to channel funds directly into
consumer and SME lending, has led some to predict
profound disruption of the traditional banking model.
Unlike banks, which take in deposits and lend to
consumers and businesses, MPLs do not take deposits
or lend themselves. They take no risk onto their own
balance sheets, and they receive no interest income
directly from borrowers. Rather, they generate income
from fees and commissions generated by matching
borrowers with lenders.
This paper looks at the potential for MPLs to take
material share from banks’ core lending and deposit-
taking businesses. It tests the hypothesis that, to be truly
disruptive, MPLs would need to possess competitive
advantages that create real customer value for both
borrowers and lenders that incumbent banks cannot
counter. As part of this research, Deloitte commissioned
YouGov to conduct consumer and small-business
research, and also spoke to several UK marketplace
lenders, banks and investment managers. Deloitte also
developed a UK ‘MPL opportunity-assessment model’,
comparing the lending costs of banks and MPLs, and
forecasting the future size of the MPL market.
Based on this research, Deloitte draws the conclusion
that MPLs do not have a sufficiently material source of
competitive advantage to threaten banks’ mainstream
retail and commercial lending and deposit-gathering
businesses. Critically, banks should be able to deploy
a structural cost of funds advantage to sustainably
under-price MPLs if it becomes clear that the threat of
lost volumes makes this the value maximising strategy.
Three key observations underpin this conclusion:
• any operating cost advantage that MPLs may have is
insufficient to offset the banking model’s material cost-
of-funds advantage. It is our view that in today’s credit
environment, the cost profiles of banks and MPLs are
roughly equal, meaning neither has a material pricing
advantage. However, Deloitte also believes that banks
will have a structural cost advantage over MPLs if and
when the credit environment normalises
• although borrowers currently value the benefits of
speed and convenience offered by MPLs, these are
likely to prove temporary as banks replicate successful
innovation in this area. In addition, Deloitte believes
that borrowers who are willing to pay a material
premium to access loans quickly are in the minority
• our research suggests that most people understand
that lending money via an MPL is not comparable
to depositing money with a bank. This is largely due
to the fact that MPL investments are not covered by
the government’s Financial Services Compensation
Scheme (FSCS) which protects the first £75,000 of
deposits. There may be times in the cycle where supply
constraints in the banking sector make certain areas of
marketplace lending a more attractive asset class. This
is unlikely to be an enduring advantage, however, and
the capital provided here is more likely to be deflected
from fixed-income or equity investments rather than
from bank deposits.
In this publication, ‘we’ and ‘our’ refer to Deloitte LLP, the UK member firm of Deloitte Touche Tohmatsu Limited.
MPLs do not have a sufficiently material source of competitive advantage
to threaten banks’ mainstream retail and commercial lending and
deposit-gathering businesses.
2
We do not believe that the banking model will be fully
disrupted by MPLs. Based on our market sizing analysis,
MPLs will not be significant players in terms of overall
volume or market share. However, we also do not believe
that MPLs are a temporary phenomenon. They seem
likely to become a permanent part of the landscape by
performing at least two valuable functions:
• they may provide supply into areas of the lending
market where banks do not have the risk appetite to
participate, such as high-risk retail borrowers
• while the likelihood of a significant outflow of deposits
from the banking system does not seem strong, MPLs
may offer a low-cost option for certain investors to gain
direct exposure to new asset classes.
We do not believe that the banking model
will be fully disrupted by MPLs. However, we
also do not believe that MPLs are a temporary
phenomenon.
So what, if anything, should banks do? Our fundamental
view is that MPLs do not present an existential threat
to banks and, therefore, that banks should view MPLs
as complementary to the core banking model, not as
mainstream competitors. We therefore believe that
banks can, and should, evaluate a wide range of options
for enhancing their overall customer proposition by
partnering with MPLs. Options might include:
• providing easy access to such platforms for borrowing
that is outside a bank’s risk appetite
• keeping an eye on evolving credit models
• leveraging MPL technology to enhance the customer
experience
• utilising elements of the MPL model to expand
geographically without bearing the distribution and
regulatory costs of the traditional bank model.
E
xecu
tive su
m
m
ary
3Marketplace lending | A temporary phenomenon?
1. What is marketplace lending?
This section is designed as an introduction to what
marketplace lending (MPL) is and how the MPL model
differs from the banks’ traditional lending model. It also
provides a snapshot of the state of the MPL market in
the US and continental Europe for comparison with
the UK.
The world’s first MPL, Zopa, was founded in the UK in
2005. The first MPL in the US, Prosper, was founded in
2006, and the first in China, Paipaidai, was launched in
2007. Initially, such platforms enabled retail borrowers
and investors to contact each other directly, or ‘peer-
to-peer’ (P2P). More recently, institutions have begun
investing in bundles of loans, prompting the sector to be
named more accurately as ‘marketplace lending.’
Unlike banks, which take in deposits and lend to consumers
and businesses, MPLs do not take deposits or lend
themselves. They therefore take no risk onto their balance
sheets (see Figure 1). Nor do they have an interest income,
but rather generate income from fees and commissions
received from borrowers and lenders/investors.
Investors can select the return they require on their
investment by specifying maturity or risk profile (based
on an assessment of the credit risk represented by the
platform) or through a combination of the two.
Most platforms split the money invested by lenders into
smaller ‘tranches’ and lend it on to several borrowers.
This ‘embedded securitisation’ aims to minimise the risk
of default by spreading lenders’ investments across a
large number of borrowers.
MPLs generally update the risk-model algorithms that
underpin their credit-scoring approach more frequently
than banks
In 2014, US$ billion of loans were issued through
marketplace lending platforms globally, concentrated
primarily in the US (51 per cent), China (38 per cent) and
the UK (10 per cent). The total grew at a CAGR of around
120 per cent between 2010 and (Please see the
US and European boxes below for more information on
the respective markets).
Traditional bank lending model Marketplace lending (MPL)
Figure 1. Lending business models, banks vs MPLs
Source: Deloitte analysis
• Banks act as an intermediary between savers and
borrowers. They pay interest on deposits and lend
money to consumers and businesses
• They generate income by taking risk onto their
balance sheets and managing spreads between the
interest banks charge on loans and that paid on
savings
• This risk-taking requires them to hold capital to
absorb potential losses
• Depositors have limited control or visibility over how
their money is used
• Banks engage in maturity transformation as the
deposits are typically shorter term than the loans,
creating a need for a liquidity buffer.
• Marketplace lenders directly match lenders with
borrowers via online platforms
• They do not lend themselves, so they do not earn
interest and do not need to hold capital to absorb
any losses
• They make money from fees and commissions from
borrowers and lenders
• MPLs use traditional, bank-like, credit-scoring
approaches, and publicise these credit risk scores
• MPLs offer transparency and control to lenders, such
as through disclosure on recipients of funds lent out
• Generally, by design, there is no maturity
transformation involved.
Lender(s) Borrower(s)
(Fees/commissions)
Loan repayments
Loan
Depositor(s)
Saving(s) Loan(s)
Interest and
loan repayment(s)
Interest on
saving(s)
Borrower(s)
Bank
MPL
4
$0
$5,000
$10,000
$15,000
$20,000
$25,000
Figure 2. US MPL annual loan volumes, US$ million, 2011 – 2015*
LendingClub Prosper SoFi OtherAvantOnDeck
20152014201320122011
CAGR:
%
Source: Direct Lending: Finding value/minimising risk, Liberum, 20 October 2015, .
See also: Deloitte analysis
* Figures are rounded to the nearest million
$473
$1,529
$4,114
$10,653
$22,732
1. W
h
at is m
arketp
lace len
d
in
g
?
An overview of marketplace lending in the US
Current size of the market
It is estimated that marketplace lenders (MPLs) in the US accounted for loan originations worth approximately
US$23 billion in 2015 (see Figure 2). LendingClub, an unsecured consumer lending platform, is the largest MPL in the
US and originated US$ billion-worth of loans in While LendingClub accounts for a significant share of the
market, many other players in the US lending marketplace are focused on a wide range of individual segments,
such as student loans.
Notary model
The widely adopted model for US marketplace lenders is
the so-called ‘notary’ model,4 in which:
• borrowers apply for a loan on a marketplace platform
• accepted loan applications are then originated by a
partner bank (LendingClub and Prosper use Utah-based
WebBank); the MPL performs the underwriting of the
loans, using criteria agreed with the partner bank5
• platforms purchase the loan from the partner bank6
• the platform issues a note to lenders, instead of a
(Since February 2016, WebBank has held an interest in
newly-issued loans sold via the LendingClub platform; in
return, LendingClub pays a ‘trailing fee’ to the bank.)8
Institutional investors
Institutions, including hedge funds, private equity
firms and banks, provide the bulk of lending through
marketplace platforms in the Such investors,
which are able to use due-diligence services offered by
intermediaries such as Orchard,10 can also use their own
risk models to ‘cherry-pick’ under-priced loans on the
platforms. (The Peer-to-Peer Finance Association (P2PFA)
has prohibited this practice to its members in the UK.)11
Partnerships between banks and MPLs are becoming
increasingly common in the US. BBVA Compass bank,
for example, partners with OnDeck to originate small
business loans through the platform by referring
customers for smaller loan
5Marketplace lending | A temporary phenomenon?
The US market has already witnessed
increased collaboration between banks and
marketplace lenders, and Deloitte expects
stronger integration of this sort to take place
in the future.
Other bank partnerships focus on funding, . rather than
simply referring the loan on to an MPL, the bank provides
the funding themselves. For example, LendingClub and
Citigroup announced a partnership in April 2015 in
which Citigroup provides borrowers on the platform with
funding through the Varadero Capital hedge fund, which
takes on the first loss risk. Such arrangements allow banks
to provide funding to higher-risk individuals or SMEs,
while passing much of the credit risk on to investors
searching for
Retail investors
The Securities and Exchange Commission (SEC) views
promissory notes14 issued by platforms as debt-backed
securities. Securities regulations prevent retail investors
from investing in unregistered securities, meaning that retail
investors may lend only via platforms that have registered
their promissory notes as securities with the SEC. Both
LendingClub and Prosper have gone through the SEC-
registration process, allowing retail investment through
these platforms. Securities regulations also prevent retail
investors from investing in business loans in the
Furthermore, some state regulations prevent retail
investors who do not meet certain eligibility requirements
from lending through the platforms. Some states
currently prevent retail investment
Securitisation
The development of marketplace lending in the US has
been so strong and rapid that there is now demand
for securities backed by marketplace loans, as they
have become an investment-worthy asset class in their
own right. This has added liquidity to the market, and
may help to lower the cost of funding. There were
approximately 40 MPL securitisations up until Q4 2015,17
and the market has also seen its first rated securitisations.
One MPL, SoFi, which offers loans to creditworthy
students at lower rates than the government or
traditional lenders, was the first to receive a triple-A
rating for a marketplace loan-backed
Prosper, too, has securitised US$327 million of its loans
with the participation of the BlackRock investment
management
What lies ahead?
The US market has already witnessed increased
collaboration between banks and marketplace lenders,
and Deloitte expects stronger integration of this sort
to take place in the future. Such partnerships will help
marketplace lenders to increase awareness among
borrowers and investors, gain scale and possibly lower
their customer acquisition costs.
6
Recent developments in the market
Currently, there is no pan-European regulation that
specifically covers marketplace lending. MPLs are subject
to regulation at a national level. While many countries
do not have MPL-specific regulation in place, some
member states, including France, have introduced
specific regulation covering aspects such as disclosure,
due diligence and the assessment of
Furthermore, the European Commission’s Capital Markets
Union initiative emphasises the role that MPLs could play
in helping SMEs diversify their sources of funding.
Despite such differences between national regulatory
frameworks in Europe, a number of MPLs have sought
to expand or consolidate across borders in an attempt to
achieve the volume required to scale their businesses. For
example, French consumer MPL Prêt D’Union,
the largest player in the French market, has raised €31
million primarily to expand into UK MPLs are also
expanding into continental Europe: Funding Circle, for
example, has acquired German MPL Zencap and launched
operations in Spain and the
The continental European market is also following the
lead of better-established markets with the growing
involvement of mainstream financial institutions. There is
an emerging trend for MPLs to partner with banks. This
includes the recent joint partnership between Sparda-
Bank Berlin and Zencap (now Funding Circle Germany)26
in which the bank provides its clients with the MPL
platform’s business loans as an investment option.
Aegon, the Dutch insurer, also announced plans in
October 2015 to lend €150 million to borrowers through
the German consumer MPL,
As the market gains traction, we believe that the
unclear implications associated with the currently limited
regulation may lead to concerns about MPLs potentially
looking to gain scale through imprudent business
practices and the improper use of client monies. In
October 2015, for example, the Swedish marketplace
lender TrustBuddy declared bankruptcy28 after the
platform uncovered alleged misconduct within the
organisation, including misuse of lender Such
developments have fed existing fears that the failure
or impropriety of one platform may tarnish the entire
industry at this early stage of development.
An overview of marketplace lending in continental Europe
MPLs in continental European markets have not benefitted from the same government support or regulatory approach
as their counterparts in the UK. A deeper-rooted cultural aversion to risk than in the UK may also have constrained
This may explain why MPLs in continental Europe originated just €669 million in loans in 2015 (see Figure 3),
while UK marketplace lenders originated £2,739 million (€3,513 million21) (see Figure 4).
Germany and France are the largest MPL markets in Europe after the In continental Europe, the consumer lending
market accounts for the bulk of marketplace loans (see Figure 3). The situation is different in the UK, where both the
consumer and business lending markets are well developed (see Figure 4).
Figure 3. European MPL annual loan volumes (excluding the UK), € million, 2010 – 2015*
MPL business lending MPL consumer lending
20152014201320122010 2011
CAGR:
%
CAGR:
%
CAGR:
%
See also: Deloitte analysis
*MPL business lending includes invoice trading, figures are rounded to the nearest million
€29 €32
€65
€338
€284
€54
€174
€9
€165
€669
€543
€126
€3€62€26€23 €6€6
1. W
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at is m
arketp
lace len
d
in
g
?
7Marketplace lending | A temporary phenomenon?
2. Marketplace lending: a disruptive threat
or a sustaining innovation?
On the surface, marketplace lending looks like a
quintessential disruptive force, as it embraces such
structural effects of the digital economy as:
• the trend towards growing trust in online transactions
• increasing consumer expectations of immediacy
• the proliferation of public data (for risk scoring).
MPLs appear set to overcome structural barriers to entry
such as banks’ extensive branch networks and privileged
access to customers and their data. The use of digital
channels, streamlined processing and innovative risk
scoring, combined with a model without the compliance
costs of highly-regulated bank intermediation, is certainly
advantageous. It would appear to position MPLs well
to provide a wider base of borrowers with faster, more
convenient access to credit at a lower price point than is
achievable by banks, which remain hamstrung by legacy
IT infrastructure and an outdated and expensive physical
distribution network.
At the same time, by offering investors access to
profitable asset classes that had hitherto been the
exclusive preserve of the banks, MPLs appear capable of
threatening the core deposit-funding base of the banks
if deposit customers can be attracted to the higher yields
and easy, transparent access they offer.
In many ways the situation appears analogous to the
rapid growth of the securities markets in the US. This
witnessed a dramatic reshaping of financial services as
loans and deposits left the core banking system, attracted
to the solutions offered by the new ‘technology’ of the
capital markets. According to Deutsche Bank, capital
markets accounted for more than 80 per cent of debt
financing for businesses in the US in Q4 2013, compared
to just 20 per cent in
That is the core of the argument stating that the
traditional bank lending model faces profound disruption,
and there is some evidence to support it. MPL-based
consumer lending in the UK grew at a CAGR of per
cent between 2010 and 2015. SME lending (including
invoice trading) via MPLs experienced even faster growth,
growing at a CAGR of per cent during the same
period (see Figure 4). Furthermore, the total number of
active borrowers using UK MPL platforms almost doubled
in 2015 alone, rising year-on-year from approximately
140,000 to approximately 275,000, as of Q4
Figure 4. UK MPL annual loan volumes, £ million, 2010 – 2015*
MPL business lending MPL consumer lending MPL share of total consumer lending MPL share of total business lending
20152014201320122010 2011
CAGR:
%
CAGR:
%
CAGR:
%
See also: Bank of England; Deloitte analysis
*MPL business lending includes real estate loans and invoice trading, figures are rounded to the nearest million
£2,739
£1,625
£1,114
£568
£1,534
£648
£364
£284 £966£205
£125
£34£57£57 £11 £80£91£68
%
%
%
%
Source: Liberum AltFi Volume Index, AltFi Data, data as of 26 February 2016.
8
In addition, the amount of direct equity investment in MPL platforms (UK MPLs raised more than US$220 million in
equity capital in 201532), and the amount of institutional money being channelled through MPLs into consumer and
SME lending, suggest that sophisticated players are backing this sector to grow significantly.
Finally, any search for a personal loan on key aggregator sites shows the increasing pervasiveness of MPLs. Overall, MPLs
look highly price-competitive, particularly for lower-value loans (see Figure 6).
0
20
40
60
80
100
120
Apr-15Mar-15Feb-15Jan-15Dec-14Nov-14Oct-14Sep-14Aug-14Jul-14Jun-14May-14Apr-14Mar-14Feb-14Jan-14
Loans originated (monthly, £ million) and share of institutionally funded loans (%)
See also: Deloitte analysis
Lo
an
s
or
ig
in
at
ed
Sh
ar
e
of
in
st
it
ut
io
na
lly
f
un
de
d
lo
an
s
Figure 5. Estimated aggregate institutional participation in loans originated by Funding Circle, Zopa and RateSetter
Loans funded by institutions Loans funded by retail investors % of loans institutionally funded
0%
5%
10%
15%
20%
25%
30%
APRs (%) by loan value
Source: MPL and bank websites, , Deloitte analysis. Data as of 23 February 2016
Figure 6. UK personal loan annual percentage rates (APRs) for three-year duration loans, MPLs and banks
MPLs Banks
0%
5%
10%
15%
20%
25%
30%
35%
£25,000£10,000£5,000£1,000
0%
5%
10%
15%
20%
25%
30%
35%
2
. M
arketp
lace len
d
in
g
: a d
isru
p
tive th
reat o
r a su
stain
in
g
in
n
o
vatio
n?
Source: Is ‘P2P’ Lending a thing of the past?, AltFi Data, 19 May 2015.
9Marketplace lending | A temporary phenomenon?
The key question is whether the momentum we are currently witnessing could progress to cause a profound
disruption of banking (and possibly some elements of asset management), or whether MPLs will turn out
instead to be a ‘sustaining innovation’: one that forces incumbents to up their game in core markets and that
may pioneer the provision of credit into previously under-served segments, but that does not fundamentally
change the financial services landscape.
a superior customer (borrower) experience, driven by speed and convenience
an ability to better absorb and diversify risk by matching the appetite of borrowers and
investors for both risk and duration.
Given that the market-penetration achieved by MPLs is to date still well below one per cent, and that the ability to lead the
market for pricing on loans does not necessarily indicate superior or sustainable risk management or cost control, it is worth
investigating such broad assertions in detail. Essentially, the case for MPL disruption is built on four potential sources of
sustainable competitive advantage:
The next three sections review these factors to understand whether MPLs constitute a truly disruptive threat to banks.
We then use our findings to determine our view on the potential market size of marketplace lending in the UK.
a fundamentally lower-cost operating model
an ability to use public data to (safely) overcome incumbents’ data advantage in scoring risk,
potentially going on to achieve better risk-pricing by taking a more agile ‘Big Data’-based approach
10
3. The relative economics of marketplace
lenders vs banks
Banking has a reputation as an expensive form of financial
intermediation. After all, if banks provide the most efficient
way to borrow, why would so many of the world’s largest
borrowers rely instead on the capital markets?
However, there have historically been limits to the scope
and reach of the capital markets. Borrowers need to be of
sufficient scale to justify the investment required to gain
a credit rating, and must also be prepared to disclose the
information necessary for securities to be issued. Mid-
market/SME banking in general has proven to be an asset
class where the cost of securitisation outweighs its value,
leaving banks as the main source of funding.
So, have MPLs found ways to overcome these cost
barriers and provide a lower potential price-point than
the banks at these lower loan values? Below we look
at the relative costs of various loan types offered by the
traditional bank lending model and the MPL
We have examined the costs incurred in originating and
servicing a loan through the traditional bank model with
an equivalent loan originated and serviced through an
MPL. This analysis does not compare the total costs of
operating a bank to the total costs of operating an MPL.
Figure 7. Cost economics of illustrative bank and MPL loans
460 bps
720 bps
715 bps
500 bps
815 bps+45 bps
+500 bps
+90 bps
+180 bps
Bank loans, % of loan amount (bps)
MPL loans, % of loan amount (bps)
Source: Deloitte analysis
Total – Unsecured
SME loan
Total – Retail
buy-to-let mortgage
Total – Unsecured
personal loan
Fees,
commissions
and other income
Loan
losses
Funding
costs
Deposits
operating
expenses
Loan operating
expenses
800 bps
-85 bps+200 bps
+200 bps
+270 bps
+215 bps
Total – Unsecured
SME loan
Total – Retail
buy-to-let
mortgage
Total – Unsecured
personal loan
Platform
funding costs
Loan funding
costs (ie. return
to lenders)
Operating expenses
attributable to
lenders
Operating
expenses
attributable to
borrowers
3
. T
h
e relative eco
n
o
m
ics o
f m
arketp
lace len
d
ers vs b
an
k
s
11Marketplace lending | A temporary phenomenon?
Whether or not MPLs have a pricing advantage over
banks depends primarily on three factors: the cost of
funds; operating expenses; and how they price risk. While
operating expenses of MPLs are most commonly compared
with those of banks, we believe that a holistic comparison
including funding costs is necessary to reach an accurate
assessment of the two models’ relative economics.
Cost of funds
For banks and MPLs alike, funding costs are a major
component of a loan’s total cost profile. To make a true
comparison between the expenses incurred by each type
of institution, we have examined the respective costs
of attracting the funds they require to participate in the
loan-making process.
For a bank to make a loan, it must first attract deposits,
wholesale funding and equity onto its balance sheet and
must maintain liquidity reserves to meet the needs of its
customers. The costs of loan-making include the direct
costs of funding and liquidity (such as the interest rates,
yields and returns payable on these funding sources).
Furthermore, attracting and retaining deposits involves
more than just paying interest: banks must also provide
payment and processing services; most must also run a
branch network; and they will incur significant regulatory
and marketing costs and other non-interest expenses.
The true cost of attracting the funds to the bank must
take account of these non interest-based costs of
gathering
However, borrowing via a bank may give the borrower
access to a wider range of services, such as international
payment systems, which are not part of the MPL service
offering. Banks may be able to generate income from
these services and the borrower may see value in “one-
stop-shopping”.
For an MPL to make a loan, it must attract lenders. Clearly
this involves offering returns that outweigh the risks
that lenders are prepared to take on. It will also incur
marketing costs, lender-processing and servicing costs
and other non-interest expenses. In addition, the platform
itself must be funded, and the MPL must be able to pay
a return to its own investors. Unlike a bank, however, an
MPL does not need to incur the costs associated with
offering current accounts, such as providing payment
services and running a branch network.
In Figure 8, we examine these ‘fully-loaded’ costs,
comparing the total costs of attracting funds into banks
versus the costs faced by MPLs. Two observations are key.
First, the total funding costs for banks are lower than for
MPLs. Second, the non-interest component of an MPL’s
funding profile is proportionately lower than it is for a
bank. We therefore believe that MPLs’ costs will rise by
more than banks’ as the credit environment normalises and
interest rates increase. Figure 8 illustrates this point, using
a scenario where base rates have returned to 200 bps, and
credit spreads are at pre-crisis levels, to show the estimated
increase in these ‘fully-loaded’ funding costs.
Figure 8. Costs of funding an unsecured personal loan: banks and MPLs, current and normalised credit environments
not interest
rate sensitive
total increase:
13%
Total cost of
attracting funds:
470 bps
Total cost of
attracting funds:
530 bps
Current credit
environment
Normalised credit
environment
interest rate
sensitive
Bank loan, % of loan amount (bps) MPL loan, % of loan amount (bps)
Source: Deloitte analysis
Equity Wholesale
Deposits Deposits processing costs
270 bps
50 bps
60 bps
90 bps
270 bps
70 bps
65 bps
125 bps
not interest
rate sensitive
total increase:
25%Total cost of
attracting funds:
635 bps
Total cost of
attracting funds:
795 bps
Current credit
environment
Normalised credit
environment
interest rate
sensitive
Returns to lenders Returns to platform investors
Operating expenses attributed to lenders
90 bps
45 bps
500 bps
90 bps
55 bps
650 bps
MPLs’ costs
will rise by
more than
banks’ as
the credit
environment
normalises
and interest
rates
increase.
12
To look at this another way, consider that banks are able to
borrow very cheaply – taking deposits gives them inexpensive
access to funding. This is a structural benefit enabled both by
their unique regulatory position (with deposits underwritten by
the protection scheme/government) and by their ownership
of the payments infrastructure. Banks fund a significant
proportion of their balance sheets by taking current-account
deposits that are inherently less sensitive to changes in base
rates than other sources of funding, such as term deposits (see
Figure 9). For these reasons, we believe that banks will have
a structural cost advantage over MPLs if and when the credit
environment normalises.
Operating expenses
In this section, we compare the operating costs incurred by banks and MPLs by examining the structural advantages for each model in making and
servicing loans (considering the operating costs associated with lending activities alone).35
Figure 9. Bank deposit interest rates in a normal credit environment, percentages
Source: Bank of England, Deloitte analysis
1-
Ja
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Base rate Term deposits Instant access deposits Current accounts
0%
1%
2%
3%
4%
5%
6%
7%
8%
Figure 10. Operating expenses of an unsecured personal loan, banks and MPLs
Unsecured personal loan, % of loan amount (bps)
Bank MPL
95 bps
50 bps
45 bps
115 bps
50 bps
215 bps
180 bps
40 bps
Loan acquisition costs Loan processing and servicing costs Loan collections and recovery costs
Source: Deloitte analysis
For these reasons, we believe that banks will
have a structural cost advantage over MPLs if
and when the credit environment normalises.
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13Marketplace lending | A temporary phenomenon?
Customer awareness of marketplace lenders in the UK
According to the survey we commissioned as part of this research, there is a reasonable awareness of MPLs among retail
consumers and SMEs in Britain. Just over half of consumers and three-quarters of SMEs are aware of MPLs.
One in 25 retail consumers who are aware of MPLs, meanwhile, has borrowed from one. Similarly, one in
20 retail consumers who are aware of MPLs has lent through one (see Figure 11).
Among SMEs, one in 25 that are aware of MPLs has borrowed from an MPL and around one in 30 that have heard of
MPLs has lent through such a platform (see Figure 12).
MPLs are now aiming to leverage these high awareness figures to improve their conversion rates. One way of achieving
this is to form industry bodies to educate consumers. UK MPLs have formed the P2PFA, representing the majority of the
UK MPL market across all segments,37 to promote their nascent industry.
Figure 11. Awareness and usage of MPLs, retail consumers
Source: YouGov plc 2016 © All rights reserved, Deloitte analysis
Base: All GB adults (nationally representative), 2,090
See appendix for survey questions
Aware? Aware of specific MPLs? Used?
MPLs
53%
aware
53%
aware
91%
not used
4%
borrowed
5%
lent
47%
not aware
47%
not aware
14
MPLs have used a wide variety of marketing methods to drive awareness. As MPLs are innovative, digital platforms, it is interesting to note that
traditional media (TV and radio advertising in particular) represent by far the greatest source of awareness. And while early growth in the industry
is often attributed to word-of-mouth, such recommendations are not a key source of awareness at this stage (see Figure 13).
Figure 12. Awareness and usage of MPLs, SMEs
Source: YouGov plc 2016 © All rights reserved, Deloitte analysis
Base: All SME senior decision makers (nationally representative), 1,609
See appendix for survey questions
Figure 13. Sources of awareness of MPLs, retail consumers
Source: YouGov plc 2016 © All rights reserved, Deloitte analysis
Base: All GB adults aware of one or more of the above peer-to-peer lenders (nationally representative), 588
See appendix for survey questions
Other
Don't know
/can’t recall
Recommendation
Digital media
Traditional media
Traditional media
Digital media
Recommendation
Television or radio advertising
Magazine/newspaper article
Television or radio programme
(not including advertising)
Print advertising
Online advertising
(excluding social media)
Social media
Online blog
Recommendation from
a friend/colleague
Recommendation from
a financial advisor/bank
29%
11%
16%
9%
5% 3%
8% 7%
60%
26%
8%
17% 10% 4%
Aware? Aware of specific MPLs? Used?
MPLs
76%
aware
61%
aware
94%
not used
4%
borrowed
3%
lent
24%
not aware
39%
not aware
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15Marketplace lending | A temporary phenomenon?
Acquisition
Unlike MPLs, banks tend to have large existing customer
bases and the ability to drive awareness via above-the-line
advertising across a wide product portfolio. While it seems
likely that these attributes give them a material advantage in
acquiring new personal and SME loans, our research in this
area suggests that MPLs already have a surprisingly good
level of awareness: one in two retail consumers (53 per
cent) and three in four SMEs (76 per cent) are aware that
they exist36 (see the ‘customer awareness’ box). Conversion
is currently relatively low: only one in 25 retail consumers
who are aware of MPLs has actually borrowed from one.
However, the ability of MPLs to spread their message via
new digital channels, to use their speedy processes to
encourage purchase, and to leverage their structurally-
advantaged risk appetite (see ‘credit risk’ below) points to
the potential they have to negate the banks’ advantages.
Two analogies, however, provide a counterpoint to this
optimistic view of MPL’s acquisition costs.
The first is the escalation of acquisition costs among
online price-comparison sites in the UK. Here, a marketing
‘arms race’ has pushed above-the-line advertising spend
to a remarkable level, with the largest four UK price
comparison sites spending more than £100 million a
Similarly, the competition among these sites has
pushed the price of financial services-related keywords to
levels where loans sourced through these channels are
believed to be breakeven at best. Such search terms, in
fact, make up 11 of the top 20 most expensive Google
AdWords in the As MPLs seek to compete both with
the banks and with one another in mainstream lending,
it therefore appears likely that search engines or price-
comparison sites will end up with much of the value.
The other analogy is with the credit card market, where
over the last 25 years or so banks have faced intense
competition from non-bank monolines seeking to break
the relationship between the primary current account
and credit products. While these credit specialists have
had some success, even after this period of sustained
competition around a third of active credit card holders
in the UK still have a current account with the same bank
that issued their The task facing MPLs is therefore
significant, particularly given that the relationship between
the primary current account and loans is even tighter. (For
example, almost 90 per cent of SME loans are extended
to existing holders of business current accounts.) 41
Processing/servicing
Unlike in the customer-acquisition area, MPLs have a
potential advantage in processing/servicing thanks to their
ability to design from scratch purely online channels to
handle the loans on-boarding and servicing processes.
A fully automated process for processing and underwriting
loans allows MPLs to avoid the material costs that banks
have to deal with as a result of their legacy systems and
multiple channels. This also holds true for servicing where
a surprising number of banks have, for example, no
automated scoring systems for SME overdrafts – this results
in a significant proportion of relationship managers’ time
being taken up in renewing overdrafts.
As highly regulated entities, banks also incur significant
costs, both in ensuring compliance and in redressing
any breaches. For the time being at least, MPLs can
avoid much of this burden (see the ‘Regulation –
friend or foe?’ box on page 18).
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17Marketplace lending | A temporary phenomenon?
Regulation – friend or foe?
Before 2013, MPLs were subject to little or no regulation,
with none at all being tailored to the MPL model. The UK
Financial Conduct Authority (FCA) had the stated aim of
providing “adequate consumer protections that do not
create too many barriers to entry or significant regulatory
burdens for firms”.42 The FCA operates a disclosure-based
regime, designed to advance its objectives of supporting
effective competition and an appropriate degree of
protection for consumers.
The current FCA MPL regulation consists of:
• capital requirements – before 1 April 2017, marketplace
lenders with FCA authorisation must hold the following
in regulatory capital:
– a minimum of £20,000
– per cent of the first £50 million of total loans
outstanding, per cent of the next £200 million,
per cent of the next £250 million, per cent
of the remaining balance.
This will increase from 1 April 2017 to whichever is the
higher of:
– a minimum of £50,000
– per cent of the first £50 million, per cent of
the next £450 million, and per cent of all money
lent above £500
• client money protection rules – MPLs holding client
money are subject to Client Assets Sourcebook (CASS)
rules requiring firms “to ensure adequate protection of
client money when the firm is responsible for it”44
• dispute resolution rules – investors have the right to
complain, firstly to the MPL and, if the dispute remains
unresolved, to the Financial Ombudsman Service.
“The rules for dispute resolution do not mandate
specific processes, so long as complaints are dealt with
fairly and promptly”45
• if an MPL goes out of business, it must take “reasonable
steps … to ensure loan agreements facilitated on the
platform will continue to be managed and administered
with the contract terms, if the firm ceases to carry on
the regulated activity in relation to lending”46
• conduct – MPLs must “ensure that investors have the
information they need to be able to make informed
investment decisions and that all communications
are fair, clear and not misleading.”47 (For further
information, see conduct risk section below.)
Conduct risk
The FCA has defined conduct risk as “the risk that firm
behaviour will result in poor outcomes for customers.”48
The FCA expects MPLs to manage conduct risk by looking
at their business models and strategic plans to ensure that
they are identifying, mitigating and monitoring all the risks
to consumers arising from them. The FCA is clear that all
firms, including MPLs, need to accord equal significance to
customer outcomes as to commercial objectives.
Deloitte believes that five key conduct risk considerations
relate equally to lenders/investors and borrowers:
1. Investor funds are not guaranteed
MPL investors do not have access to the Financial Services
Compensation Scheme (FSCS), which protects the first
£75,000 of deposits; this is because the money lent is not
classified as a ‘deposit’.
Second, some MPL platforms have established their own
‘provision funds’ to help investors recover lost monies in
the event of borrower default. However, no MPL platform
guarantees that a provision fund will make investors
‘whole’ (enable them to receive all their money) after
borrowers have defaulted. There is a risk that investors
will misunderstand such funds as a guarantee that their
investment is safe, when their role is simply to mitigate
possible losses.
2. Liquidity risk
Investors on MPL platforms may not realise that they are
usually ‘locked in’ to their investments until they mature.
(While some MPLs have a secondary market in which
investors can cash in their investments before maturity,
such markets are currently underdeveloped.)
18
Figure 14. Risk of lending through an MPL platform compared to other savings/investment options, retail consumers
Source: YouGov plc 2016 © All rights reserved, Deloitte analysis
Base: All GB adults aware of peer-to-peer lenders (nationally representative), 1,168
See appendix for survey questions
Approximately one in five retail consumers believes lending through MPLs is as risky or less risky than savings account or
government bonds
Other securities
(. futures, options)
Stocks
Corporate bonds
Government bonds
Savings account
MPLs are more risky MPLs are less risky Don’t knowAbout the same
63%
54%
40%
34%
27% 23% 13% 36%
22%
18%
25%
9%
19%
34%
9%11% 26%
8% 10% 19%
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3. Investor understanding
Deloitte’s consumer survey shows that the general
population has a good understanding of the risks involved
in lending through MPLs. However, a significant minority
(see Figure 14) believes that savings accounts and
government bonds are riskier than investing through MPLs.
This suggests that the industry has not yet attained the levels
of customer understanding that the FCA is looking for.
Firms that fail to comply with the FCA’s disclosure regime
are at risk of enforcement action by the FCA,
but this is a punitive tool after the event, rather than
a preventative one.
4. Credit risk and the potential for financial loss
Most MPLs assign a credit risk score or particular pricing
to a loan. Investors face the risk that such scoring is
inaccurate or that such pricing does not truly reflect the
credit risk exposure.
5. Treatment of borrowers
Borrowers participating in marketplace lending are also
exposed to conduct risks, which principally include loan
affordability, treatment of customers in financial difficulty
and clarity of information before, during and after the
point of sale.
UK regulation – outlook
MPLs have a favourable view of the current size and
scope of regulation. They believe the regulation is
not overly onerous, particularly in terms of capital
requirements, allowing them to maintain one of their
key competitive advantages over banks. This light-touch
regime also allows MPLs to concentrate on growth and
innovation rather than regulatory compliance.
However, as MPLs grow and become more important
to the financial system, they are likely to become more
tightly regulated, with higher capital-adequacy ratios,
limitations to business models and more prescriptive
disclosure requirements. This could erode the favourable
regulatory arbitrage MPLs currently have over banks, and
cause them to refocus their efforts less single-mindedly
on growth and innovation.
19Marketplace lending | A temporary phenomenon?
There are questions over the sustainability of MPLs’
advantage in the area of operating costs. Banks do
appear to be disadvantaged for the time being, however,
and their ability to address this in the near future is
hamstrung by a series of factors, which also constrain
their ability to improve customer experience. Factors
include:
• their ability to attract the right talent
• their ability to prioritise investment in an environment
that is still dominated by post-crisis regulatory change
• an understandably cautious culture.
Collections and recoveries
Our research suggests that at maturity, when MPLs’ loan
portfolios are likely to more closely resemble those of the
market as a whole, MPLs will have no material source
of cost advantage over banks relating to collections
and recoveries. And while MPLs may pass the costs of
collections and recoveries on to lenders, this will over time
simply increase the required return and the cost of funds.
Credit risk
Overall, our research gives us limited grounds to believe
that MPLs will systematically price risk better in areas
where banks have an appetite to play.
Supporters of MPLs point to a number of potential
areas of advantage over the traditional bank model,
including:
• a willingness (in part born of necessity) to experiment
with a wider set of data sources for risk scoring
• a more agile approach to developing and evolving a
more agile core risk-scoring algorithm.
As further evidence that innovative approaches are
working and will improve over time, these supporters
also point to the current quoted loss rates of MPLs,
which look no worse than typical bank loss rates
(see Figure 15). However, the majority of UK MPLs are yet
to go through a credit cycle, and it therefore remains to
be seen if there will be an increase in default rates in the
event of an economic downturn.
Overall, our
research gives
us limited
grounds to
believe that
MPLs will
systematically
price risk
better in
areas where
banks have
an appetite
to play.
Figure 15. MPL default rates, 2010-2015*
0%
1%
2%
3%
4%
5%
6%
2015E20142013201220112010
Source: MPL websites, Deloitte analysis
*2015 figures are estimated default rates from MPL websites
Funding Circle RateSetter Zopa MarketInvoice Sector average
20
However, while some of the risk professionals and other
market participants we interviewed acknowledged that a
better risk-scoring algorithm might be developed outside
the banking system, all cautioned that it is too early to
tell whether or not this has happened. And, if it is does
happen, the consensus was that this was unlikely to be
the result of a systematic advantage of the MPL model;
rather, it would be a specific, model-agnostic, innovation.
In other words, banks could exploit the same algorithmic
innovations. All also commented on the fact that, in
the short-term at least, MPLs cannot replicate banks’
core advantage of having access to customers’ historical
transactional data.
That said, provided that loans behave broadly as
predicted over time, the ability to use the brokerage
model to match borrowers and lenders by risk appetite,
coupled with the diversification achieved by pooling
invested money and lending it out to several borrowers,
does seem likely to support an inherently wider risk
appetite. In turn, the resulting wider coverage of
businesses or individuals eligible for loans may potentially
deliver higher acceptance rates and so reduce the
effective cost of customer acquisition.
Relative economics of MPLs vs banks: our conclusion
Our analysis shows that banks have a structural cost
advantage over MPLs. While MPLs may enjoy slightly lower
operating costs, a bank’s broad cost profile is less sensitive
to changing interest rates than that of an equivalent MPL.
This advantage is not particularly evident in the current
credit environment, with rates at historically low levels.
However, if and when the credit environment normalises
and rates and spreads return to pre-crisis levels, we expect
that the costs incurred in MPL credit transmission will
increase by more than those of bank lending.
For these reasons, we do not believe that MPLs pose a
disruptive threat to banks in terms of relative economics.
Banks currently have a pricing parity with MPLs; this will
become a pricing advantage in a normalised interest rate
environment. Our market-sizing assessment, therefore,
does not foresee a shift in lending from banks to MPLs
owing to a structural pricing advantage.
For MPLs to be a disruptive threat, they would need
to achieve at least one of the following:
• offer a superior customer experience, potentially by
expanding their offering to include ancillary services
such as cashflow tools and business advice, for which
customers would be willing to pay a premium
• undermine banks’ funding advantage by drawing funds
away from deposits into marketplace lending.
Our analysis
shows that
banks have a
structural cost
advantage
over MPLs.
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21Marketplace lending | A temporary phenomenon?
MPLs have been able to
differentiate themselves
by offering an attractive
customer experience.
22
As part of our research, Deloitte conducted a YouGov survey of retail consumers and SMEs. The results provide strong
evidence that MPLs have been able to differentiate themselves by offering an attractive customer experience at
acceptable lending rates (see Figure 16 below).49
Figure 16. Drivers behind usage of MPLs to borrow money, retail consumers
Source: YouGov plc 2016 © All rights reserved, Deloitte analysis
Base: All GB adults who have borrowed via a peer-to-peer lending platform (non-nationally representative), 89
See appendix for survey questions
Recommendation from banker/financial advisor
Distrust of banks
Recommendation from friend/colleague
Couldn't get a loan/credit elsewhere
Less personal data required
Trying out a new way of borrowing
Little documentation required
Repayment flexibility
Competitive rates
Convenience of online platform
Fast decision-making
Easy/quick application process 81%
72%
72%
69%
55%
53%
39%
35%
30%
22%
18%
12%
This is backed up by the views expressed by the UK MPLs,
banks and investment managers we interviewed as part
of the research. According to our interviewees, borrowers
are primarily drawn to MPLs due to:
• the certainty of outcome for a loan application enabled
by a fast decision-making process
• the small amount of documentation that borrowers
need to provide as part of a loan application.
These advantages largely arise from MPLs’ customer-
driven focus on user experience (UX) as a source of
differentiation. Two questions arise:
1. how sustainable is this UX advantage? (Surely
banks can easily copy user journeys that are seen
to work and then leverage their broader customer
relationships and data to deliver a distinctive
experience that trumps what MPLs have to offer?)
2. if banks choose to flex the pricing advantage we
believe they have, how many customers will be willing
to trade UX against price?
It is clear that replicating this experience, or even
substantially closing the gap, requires more than just
overlaying a slick digital interface onto existing processes.
It ultimately requires taking a far more customer-centric
approach to product and proposition innovation,
accordingly re-engineering and automating processes
deep in the bank’s operating model. Deloitte’s work with
major institutions trying to do this has given us
a healthy respect for just how hard it is for most banks to
achieve this level of change. In our experience,
a number of factors may prevent banks from quickly
doing so, including:
• cultural and capability limitations
• the current regulatory environment
• a relatively risk-averse approach to innovation
• a limited appetite for investment, particularly given
the competing claims on such funds.
As a result, Deloitte believes that this non-cost advantage
is likely to endure for some time.
Turning to the second question, our work in the sector
suggests that while there are cases where time is critical,
a customer’s willingness to trade off UX against rate
ultimately (and unsurprisingly) tends to correlate with
the absolute difference in interest cost between the two
alternatives. We have reflected this in arriving at our
assessment of where and to what extent MPLs will win in
the market.
4. The user experience of marketplace
lenders vs banks
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23Marketplace lending | A temporary phenomenon?
Turning to the other side of the market (where investors participate to lend funds), there is a potential risk to banks. This
is that MPLs might provide easy access to a new, higher-yielding asset class (see Figure 17) for those deposit-holders
whose low returns currently provide banks with their advantaged funding base. (As noted above, this advantage is the
key to banks being able to sustain their position on the borrowing side of the market.)
Figure 17. UK returns, MPLs vs savings accounts, 2011-2015
Annual returns
See also: Interest and Exchange Rates Data, Bank of England.
See also:
Travel=NIxIRx; Deloitte analysis
0%
1%
2%
3%
4%
5%
6%
7%
8%
MPL Fixed rate bondsFixed rate ISA
Instant account (including bonus) Instant account (excluding bonus)
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1
Ap
r-1
1
Ja
n-
11
Lenders are also increasingly attracted to several intrinsic qualities of the MPL model, such as:
5. Marketplace lending as an asset class
Source: Liberum AltFi Returns Index, AltFi Data
the ability to choose the level
of risk they take on and the
return they can receive
the platforms’ ability to
minimise risk through
diversification by splitting
invested money into smaller
tranches and lending it out
to several borrowers
intuitive dashboards and a
simple investment process,
with some platforms enabling
investment in less than ten
minutes
the potential diversification
benefit from gaining access to
a new asset class (see the
‘asset managers in market-
place lending’ box for more)
the ability to choose to whom
they lend and the sheer
transparency arising from the
rich data that such platforms
make available
24
Asset managers in marketplace lending
The case for alternative lending
Many of the investment managers we spoke with as part
of our research believe that alternative lending offers two
key benefits:
• it can provide higher yields than many other
fixed-income assets (adjusted for duration and risk)
• it can be less correlated to other assets.
Such investments can come in the shape of private
placements of company debt, securitised loan funds and
direct lending through channels such as MPL platforms.
Chasing this opportunity, European fund managers
have raised around US$170 billion50 over the past five
years to invest specifically in private debt, with a marked
acceleration since 2012.
Historically, exposure to this asset class has largely
been provided by players such as hedge funds, limiting
its availability to select investors. However, increasing
longevity means the requirements of all savers are
growing more demanding, as they need their savings
to last longer while also using them for income.
Traditional asset managers are responding to these more
complex demands by building exposure to investments
beyond equities and bonds. Both models are converging,
with hedge funds seeking to expand their investor base
through more retail offerings, and traditional asset
managers increasingly offering specialised funds to
compete for market share. The resulting ‘democratisation’
of alternative asset classes, including lending, appears set
to drive a major boost in demand.
Where MPLs fit within alternative lending
Marketplace lending is a small sub-set of the alternative
lending asset class. But it offers competitive annualised
yields (non-risk-adjusted) of 5-7 per cent (see Figure 17)
compared to other debt instruments such as US
investment-grade corporate bonds ( per cent).51
The charts below compare the risk-adjusted returns
offered by MPLs to those from equities (using credit
card lending as a proxy for MPLs). This data suggests
that MPLs’ annual risk-adjusted returns are competitive
with equities. Specifically, while direct lending has
underperformed the S&P 500 index over the past
20 years, it has not had any negative return years
and has been much less volatile.
The resulting ‘democratisation’ of alternative asset classes,
including lending, appears set to drive a major boost in demand.
Figure 18. Annual returns vs standard deviation
A
nn
ua
l r
et
ur
ns
US credit cardProperty S&P 500 US credit card levered
0%
2%
4%
6%
8%
10%
12%
0% 5% 10% 15% 20% 25% 30%
Standard deviation annualised
Source: Direct Lending: Finding value/minimising risk, Liberum, 20 October 2015, .
See also: Deloitte analysis
5
. M
arketp
lace len
d
in
g
as an
asset class
25Marketplace lending | A temporary phenomenon?
Figure 19. MPL proxy vs S&P 500 total return index
Source: Direct Lending: Finding value/minimising risk, Liberum, October 2015,
See also:
MPL proxy S&P 500
0
100
200
300
400
500
600
700
20152013201120092007200520032001199919971995
A key advantage claimed by advocates of marketplace
lending as an asset class is that it is less correlated to
other asset classes. This means that exposure to MPLs
can help asset managers boost returns while diluting risk
through diversification. MPLs offer access to a distinct
borrower profile (SMEs and retail consumers), meaning
that products can be packaged to reduce specific
borrower risk. However, stresses in the economic cycle
are likely to affect these borrowers as well.
Figure 20. UK write-off rates on lending to businesses and individuals, 1993-2013
Source: Trends in Lending, Bank of England, July 2013, .
See also: Deloitte analysis
0%
1%
2%
3%
4%
5%
6%
7%
8%
Businesses MortgagesConsumer credit
1993 Q4 1996 Q4 1999 Q4 2002 Q4 2005 Q4 2008 Q4 2011 Q4
The chart below examines how write-offs in UK business/
consumer lending have varied over time, highlighting that
these are indeed linked to the economic cycle. While the
current default experience of MPLs is low, this is probably
flattered by the prevailing benign credit environment and
defaults may increase in time. Default rates are also likely
to rise as the growth of the marketplace lending model
forces it to chase more risk-laden opportunities.
26
It is worth noting that marketplace loan products will
be eligible for investment in Individual Savings Accounts
(ISAs)52 from the 2016-17 financial year. These will be
among the few fixed-income instruments readily available
to retail investors.
Not surprisingly, given the high absolute returns as well as
claims of low correlations to other assets, institutions are
increasingly being attracted to marketplace lending. As a
result, they are:
• lending directly through MPL platforms
• investing in investment trusts that lend through these
platforms
• investing in outstanding marketplace loans
• purchasing equity in MPLs
• investing in rated marketplace loan-backed securities
(in the US).53
The implications for MPLs
We believe that greater asset-manager involvement will
have the following impacts on marketplace lending:
• the majority of growth will come from credit funds
investing in securitised assets or secondary loans,
rather than from investors lending directly to specific
individuals; the creation of this secondary market for
loans will improve liquidity
• institutional investors such as pension funds, given
their longer investment horizons, can provide stable
funding to the sector; marketplace lenders will benefit
from this stability
• catering to the needs of these investors could boost
innovation in funding vehicles; for example, closed-
end funds have the advantage of a dedicated pool
of ‘locked-in’ investors, which can help marketplace
lenders better match them with the risk/maturities
• the increase in mainstream institutional money will
‘professionalise’ marketplace lending
• as asset managers increase their exposure, marketplace
lenders will need to ensure that they can deploy
incoming proceeds efficiently without ratcheting up risk
• initial asset manager interest will be in relatively larger
loans (by size). However, as more asset managers enter
the space, they will have to invest in smaller
loan sizes due to both limited supply and the need
to diversify their exposure
• at that stage, large asset managers may need to
compete directly with (or indeed swallow) marketplace
lenders to access the asset class
• however, as more asset managers invest into these
products, and given the increasing risk to client assets,
pressure will gather for marketplace lenders to face
increased regulation and higher capital requirements.
5
. M
arketp
lace len
d
in
g
as an
asset class
Not surprisingly, given the
high absolute returns as well
as claims of low correlations
to other assets, institutions
are increasingly being
attracted to marketplace
lending.
27Marketplace lending | A temporary phenomenon?
Our consumer survey illustrates both these points well. While still primarily driven by a search for yield, lenders also rate
customer experience and the ability to specify levels of risk aversion/return as key drivers (see Figure 21).
Figure 21. Drivers behind using MPLs to lend money, retail consumers
Recommendation from banker/financial advisor
Tax benefits
Recommendation from friend/colleague
Quick return on investment
Provision fund
More secure
Ability to choose who to lend to
Ability to specify risk aversion/return
Convenient
Easy/simple to use
Trying out a new way of lending/investing
Better return on investment 77%
71%
68%
62%
56%
36%
35%
35%
30%
24%
12%
11%
Source: YouGov plc 2016 © All rights reserved, Deloitte analysis
Base: All GB adults who have lent via a peer-to-peer lending platform (non-nationally representative), 161
See appendix for survey questions
*A provision fund is a stock of money, kept in a separate account, maintained to account for investor losses. It is not insurance
against default.
Proponents of disruption could point to the very material
shift in the make-up of household financial assets in the
US that was driven by the growth of capital markets.
They could make the case for a similar decline in deposits,
with MPLs playing the role of a more democratised
capital market. However, such a perspective is predicated
on the belief that the asset classes MPLs are opening
up to retail investors provide a compelling alternative
to deposits. Our research suggests that most people
understand that lending money through an MPL is much
riskier than depositing money with a bank (see Figure 14),
and therefore is not a comparable investment. And, while
the creation of an ISA-wrapped product may cause some
existing ISA funds to switch to this new asset class, the
underlying risk profile of MPLs would make it more likely
for them to cannibalise existing stocks & shares ISAs than
cash ISAs.
Our research also suggests that, while the non-price
benefits that MPLs provide to lenders (namely the
transparency and control over the businesses or
individuals to which funds are lent) may provide a
material motivation for some participants, this is certainly
not universally the case.
Overall, therefore, the case for predicting a significant
outflow of deposits from the banking system does not
seem strong.
Rather, we see MPLs as a low-cost approach for certain
investors to gain direct exposure to new asset classes.
This is particularly attractive when coupled with emerging
technologies to dynamically manage an overall portfolio
of such investments, with potential implications for the
fees that traditional asset managers charge.
28
5
. M
arketp
lace len
d
in
g
as an
asset class
29Marketplace lending | A temporary phenomenon?
The extent to which MPLs take share across various
asset classes will depend on a number of complex and
interrelated factors. However, to arrive at an initial view,
we have considered just two primary variables in a total
of four scenarios:
• how MPLs may grow in the current credit market
environment, compared with how they may fare once
rates increase and banks’ cost-of-funds advantage
becomes more material
• how MPLs’ growth may be affected if incumbent banks
invest to improve their customer experience, compared
with a scenario where banks rely purely on their pricing
advantage.
Figure 22. UK MPL total market penetration scenarios, 2025*
Current interest rate environment prevails
Banks do not innovate
£
6% penetration of addressable market
£
2% penetration of addressable market
£
3% penetration of addressable market
£
<1% penetration of addressable market
Current interest rate environment prevails
Banks innovate
Interest rate environment normalises
Banks do not innovate
Unsecured SME loan
£
Retail buy-to-let mortgage
£
Unsecured personal loan
£
Unsecured SME loan
£
Retail buy-to-let mortgage
£
Unsecured personal loan
£
Unsecured SME loan
£
Unsecured personal loan
£
Unsecured SME loan
£
Unsecured personal loan
£
Interest rate environment normalises
Banks innovate
Source: Deloitte analysis55, 56
* We calculated our market penetration forecasts for retail mortgages in the chart above using buy-to-let mortgages as the total addressable market as these are
currently the only retail mortgages that MPLs offer in the UK. More generally, we think that price is a sufficiently important purchase criterion in the prime residential
mortgage market to prevent MPLs from addressing it.
6. The future of marketplace lending
Having done this, we then assigned a probability to
each of these four scenarios and computed a weighted
estimate of market share. This analysis makes use of
our assessment of both the cost and non-cost drivers of
the MPL model’s potential advantages detailed above
to forecast the future size of the MPL market and the
penetration of marketplace
30
Based on this analysis, we believe that MPLs will not
be significant players in terms of overall volume or
share. We do not believe that marketplace lending will
fundamentally disrupt or displace banks’ core function as
lenders in the mass market. That is not to belittle MPLs’
undoubted achievements or the innovation they have
brought to the market. But we see them as a sustaining
innovation, likely to be limited to serving profitable,
underserved segments that are currently overlooked by
incumbent banks.
We do not believe that
marketplace lending will
fundamentally disrupt or
displace banks’ core function
as lenders in the mass market.
However, even while MPLs look unlikely to
grow sufficiently to displace banks, banks
can benefit from adopting some of their best
practices, particularly those around customer
experience.
More specifically, we see MPL penetration varying across
asset classes. This is primarily due to the differential in
risk appetite between incumbents and MPLs, as well
as differing customer preferences. MPLs seem more
likely to corner parts of the market where a significant
proportion of borrowers fall outside the banks’ risk
appetite. And while we believe that such customers are in
the minority, MPLs are also likely to continue succeeding
in segments that value speed and convenience enough
to pay a premium (such as SMEs, particularly in invoice
financing, or high-risk retail borrowers). We believe MPLs
will struggle to compete in asset classes where the cost
of funds makes up a greater proportion of the total
cost of a loan, and where price is a far more important
consideration than speed and convenience (such as buy-
to-let mortgages).
However, even while MPLs look unlikely to grow
sufficiently to displace banks, banks can benefit from
adopting some of their best practices, particularly those
around customer experience. We explore this in the
following section.
6
. T
h
e fu
tu
re o
f m
arketp
lace len
d
in
g
31Marketplace lending | A temporary phenomenon?
• in seeking to offer MPL-originated funding to its
customers, a bank faces a series of choices that are
not dissimilar to those involved in providing general
insurance (GI) products to their customers. This is true
both in terms of the overall model to adopt and the
choices, deep inside their operating model, that will
determine the degree of control they will continue to
exercise over their customers’ overall experience. So,
should a bank create its own MPL, develop a close
partnership with a single MPL, or set up a panel of such
providers? And, in relation to the last two options, who
would manage collections and recoveries?
Answering these questions is beyond the scope of this
paper. As noted above, answers will depend on a bank’s
overall strategy and capabilities. But we have attempted
to start making some general observations on the main
high-level options we see for collaboration, summarised
in Figure 23.
So, given this overall conclusion about the relative
competitiveness and advantages between MPLs and
banks, how should banks respond? Clearly the answer will
depend significantly on an individual bank’s current and
future participation and competitive strategy, including
geographical expansion; however, focusing on MPLs’
relative advantages in terms of better UX and a wider
potential risk appetite leads us to two broad strategic
recommendations regarding banks’ lending business.
First, we think it is clear that banks should seek to
replicate elements of the UX being delivered by
leading MPLs, particularly on the borrowers’ side of
the marketplaces. They should prioritise those asset
classes and use cases where UX has the most weight
in influencing customers’ purchasing decisions.
Second, we think that providing customers with
transparent access to MPL-originated funds (when a
customers’ requirements are outside the bank’s risk
appetite) would be a sensible step. It would enhance
a bank’s overall customer proposition and, structured
properly, provide an opportunity to capture more of the
latent value inherent in its brand, physical distribution
network and existing customer relationships.
However, some important and complex choices underlie
these two broad recommendations:
• in seeking to improve their UX, should banks: pursue
an organic, in-house development approach; buy an
existing MPL that might have great technology but has
failed to gain market traction; or in-source those parts
of the overall customer journey that are most in need
of improvement from an established player (such as
JP Morgan Chase’s deal with OnDeck detailed in
Figure 23)?
7. How should incumbents respond?
32
Source: Deloitte analysis
Figure 23. Banks’ short-term collaboration options
White
label
• A bank-branded
MPL, for which the
bank provides only
the brand name
• End-to-end MPL
model operated by
third-party MPL
• No known examples • Relatively quick, low-risk and
non-capital-intensive way to enter
or expand bank’s participation in
existing or new segments
• Leverages existing brand equity
and maintains/creates brand
recognition in target market
• Provides potential access to data
to improve bank’s risk scoring
• Potential risk to brand
for limited financial
upside
• Delivering joined
up customer service
to multi-product
customers
• Managing customers’
core UX expectations
• Financial viability of
partner MPL
• Banks with a strong
customer franchise but
constrained organic
growth capacity due
to challenges relating
to, .:
– access to
competitive funding
– risk appetite/capital
capacity
– investment capacity
Capability
insource
• A bank-branded,
on balance sheet
lending service (.
consistent with
current banking
model)
• Involves sourcing
elements of the
lending value-chain,
such as:
– acquisition
– origination
– underwriting
– servicing
• JP Morgan Chase
provides loans to its
SME customers using
OnDeck’s platform57
• OnDeck provides
origination,
underwriting and
servicing
• Platform is externally
branded Chase
• Funds come from
JP Morgan Chase’s
balance sheet
• Delivers benefits of superior
MPL UX capability and opex
efficiency quickly and with limited
investment
• Maintains customer relationship
and grows balance sheet
• Provides deeper learning
opportunity than less integrated
options
• Maintaining
appropriate level of
control and oversight
without undermining
competitiveness of
insourced capability
• Adjusting internal
processes and policies
to enable full benefits
of new capabilities to
be realised
• Financial strength/
viability of supplier
MPL
• Banks already in the
market, with strong
demand and available
funds but which are
hampered by legacy
tech/processes and
want to improve
efficiency and cost
effectiveness
• An enabler for
smaller banks with
limited customer
acquisition and/or
limited capability to
underwrite61
Deploy
funds
• Investing customer
deposits through an
MPL platform
• Metro Bank deploys
customer deposits
through Zopa58
• Flexible, low-cost channel (limited
lending opex) to deploy excess
customer deposits with relatively
high expected net yield
• Provides potential access to data
to improve bank’s risk scoring
• Potential brand halo effect
(supporting the challengers)
• Does not directly build
the customer (lending)
franchise
• Need to perform
proper due diligence
on the underlying
model, as many MPLs
have a limited track
record
• Banks with a low
loan-to-deposit ratio
seeking alternative use
of “excess” funds
• Banks seeking to
create positive public
relations
Refer
borrowers
• Referring less
profitable customers
or customers outside
of the bank’s risk
appetite to an MPL
platform
• RBS and Santander
UK59 refer SME
customers rejected
for a loan to Funding
Circle
• Improves risk-weighted assets
while maintaining customer
relationship
• Involves possibility of bank
receiving referral fees from MPL
• Allows banks to provide an option
to under-served segments
• Enables any regulatory
requirements to be met, such as
referral legislation60
• No immediate income,
if referral fees are
opted out
• Responsible-lending
issues may arise from
economic interests
• Banks with a large
number of loan
applications which
they are unable to
serve
B
an
ks
c
o
-o
p
ti
n
g
e
le
m
en
ts
o
f
th
e
M
P
L
m
o
d
el
Options Description Example Benefits Challenges Suitable for
Beyond such important choices relating to banks’ lending business, our research suggests that there is only a limited
need for banks to respond to the potential threat MPLs pose to their deposit-gathering activities. Deloitte believes that
they can be relatively relaxed about their choices regarding access to such investment opportunities alongside their
traditional savings products, and about how far they seek to create greater transparency around the uses to which
they put depositors’ funds. That said, banks aiming to create a specific brand positioning might find an interesting
opportunity in the transparency of the MPL model to bring such brand promises to life.
7. H
o
w
sh
o
u
ld
in
cu
m
b
en
ts resp
o
n
d
?
33Marketplace lending | A temporary phenomenon?
Our analysis highlights that
banks’ low cost funding
model means they retain
a powerful competitive
advantage. This is likely to
prove even more powerful
when and if base rates rise.
34
Marketplace lending is demonstrating the potential for
new business models to disrupt traditional banking by:
• taking advantage of the wider trends that are reducing
barriers to entry
• enabling the rapid deployment of capital into hitherto
restricted asset classes.
However, our analysis highlights that banks’ low-cost
funding model means they retain a powerful competitive
advantage. This is likely to prove even more powerful when
and if base rates rise. As a consequence, we do not foresee
banks being systematically displaced from their core roles
of lending to retail consumers and small businesses, and
collecting deposits from those segments.
However, we believe marketplace lenders are likely to
secure a strong foothold in areas of the market where
banks do not have the risk appetite to compete.
This will form a bridgehead from which they can expand
at those times in the cycle when banks are pulling back
from lending or relying on super-normal profits in order
to cross-subsidise other parts of their business. (This is
a particular problem in the UK at this point in the cycle.)
We therefore believe that there is a significant consumer
benefit to be had by establishing a vibrant, innovative MPL
sector, provided that consumer interests are fully considered
and that players do not over-reach and over-promise in
trying to compete with banks in mainstream markets.
C
o
n
clu
sio
nConclusion
35Marketplace lending | A temporary phenomenon?
Appendix
Figure 11: (Aware of marketplace lending?) – For the following question, by ‘peer-to-peer lenders’, we mean lenders
other than banks or building societies that facilitate direct contact between borrowers and lenders via an online
platform. This excludes payday lenders such as Wonga. Before taking this survey, were you aware of the existence
of peer-to-peer lenders? Base: All GB adults (nationally representative), 2,090
(Aware of specific MPLs?) – Before taking this survey, which, if any, of the following peer-to-peer lenders (Assetz Capital,
Folk2Folk, Funding Circle, Landbay, LendInvest, Lending Works, Madiston LendLoanInvest, RateSetter, Wellesley and Co,
Zopa) had you heard of? Base: All GB adults aware of peer-to-peer lenders (nationally representative), 1,168
(Used?) – Which of the following statements (I have borrowed via a peer-to-peer lending platform; I have lent via
a peer-to-peer lending platform; I have both borrowed and lent via a peer-to-peer lending platform; I have neither
borrowed nor lent via a peer-to-peer lending platform) apply to you? Base: All GB adults aware of peer-to-peer lenders
(nationally representative), 1,168
Figure 12: (Aware of marketplace lending?) – The following questions are about SME ‘peer-to-peer lenders’.
By this we mean lenders other than banks or building societies that facilitate direct contact between SME
borrowers and lenders via an online platform. This excludes payday lenders such as Wonga. Before taking this survey,
were you aware of the existence of peer-to-peer lenders for SMEs? Base: All SME senior decision makers (nationally
representative), 1,609
(Aware of specific MPLs?) – Before taking this survey, which, if any, of the following SME peer-to-peer lenders
(Assetz Capital, Folk2Folk, Funding Circle, LendInvest, MarketInvoice, Platform Black, ThinCats, Wellesley and Co) had
you heard of? Base: All SME senior decision makers aware of peer-to-peer lenders for SMEs (nationally representative),
1,223
(Used?) – Which of the following sentences (My business has borrowed via a peer-to-peer lending platform;
My business has lent via a peer-to-peer lending platform; My business has both borrowed and lent via a peer-to-
peer lending platform; My business has neither borrowed nor lent via a peer-to-peer lending platform) apply to your
business? Base: All SME senior decision makers aware of peer-to-peer lenders for SMEs (nationally representative), 1,223
Figure 13: How did you first become aware of each of the following peer-to-peer lending platforms (Assetz Capital,
Folk2Folk, Funding Circle, Landbay, LendInvest, Lending Works, Madiston LendLoanInvest, RateSetter, Wellesley and Co,
Zopa)? (Percentages add up to more than 100 per cent as data is aggregated for all of the above lenders) Base: All GB
adults aware of one or more of the above peer-to-peer lenders (nationally representative), 588
Figure 14: From a financial point of view, to what extent would you say that lending through a peer-to-peer lending
platform is more or less risky than each of the following, or is it about the same? Base: All GB adults aware of peer-to-
peer lenders (nationally representative), 1,168
Figure 16: Thinking about any occasions when you have borrowed money via a peer-to-peer lending platform...
On a scale of 1 to 5, where 1 is ‘Not at all applicable’ and 5 is ‘Very applicable’, how applicable were each of the
following factors in your decision to use a peer-to-peer lender rather than another source? (Chart shows percentage
of respondents choosing 4 or 5 for each factor) Base: All GB adults who have borrowed via a peer-to-peer lending
platform (non-nationally representative), 89
Figure 21: Thinking about any occasions when you have lent money via a peer-to-peer lending platform...
On a scale of 1 to 5, where 1 is ‘Not at all applicable’ and 5 is ‘Very applicable’, how applicable were each of the
following factors in your decision to use a peer-to-peer lender rather than another source? (Chart shows percentage
of respondents choosing 4 or 5 for each factor) Base: All GB adults who have lent via a peer-to-peer lending platform
(non-nationally representative), 161
36
Endnotes
1. The Future of Financial Services, World Economic Forum and Deloitte, June 2015, .
See also:
2. Can P2P Lending Reinvent Banking?, Morgan Stanley, 17 June 2015.
See also:
3. LendingClub Statistics, LendingClub, accessed 18 March 2016. See also:
4. Crowd-funding: An Infant Industry Growing Fast, International Organisation of Securities Commissions (IOSCO), 2014, .
See also:
5. Lending Club Investment Analysis, Javelin Strategy & Research, 2009, .
See also: Prosper Marketplace, Inc. Form 10-K for the
fiscal year ended 31 December 2012, United States Securities and Exchange Commission, .
See also:
6. Where Peer-to-Peer Loans Are Born, Bloomberg, 16 April 2015.
See also:
7. See endnote 4
8. Lending Club rejigs relationship with issuing bank, AltFi Data, 29 February 2016.
See also:
9. Wall Street is hogging the peer-to-peer lending market, Quartz, 4 March 2015.
See also:
10. Orchard is a particularly high-profile facilitator for institutional investment, providing the industry’s only benchmark index as well as
technology, data, and market research products and a platform that enable investors and loan originators to connect with each other
and transact efficiently.
11. Peer-to-peer body to ban institutional ‘cherry-picking’, Financial Times, 22 May 2015.
See also:
12. Why BBVA Compass Is Sending Customers to an Online Rival, OnDeck, 8 May 2014.
See also:
13. Citigroup Joins the Lending Club, Bloomberg View, 14 April 2015.
See also:
14. “A document committing the signatory to pay a certain sum of money to the payee on agreed terms. Often used to ensure the
repayment of a loan”, Financial Times. See also:
15. Peer-to-Peer Lending: A Financing Alternative for Small Businesses, the Small Business Administration (SBA), 10 September 2015, .
See also:
16. Which States are Open to Lending Club and Prosper?, Lending Memo, 17 April 2015.
See also:
17. Marketplace Lending Securitization Tracker Q4 2015, PeerIQ, 2016, .
See also:
18. Marketplace Lending Securitization Tracker Q4 2015, PeerIQ, 2016, .
See also:
19. P2P consumer loans given landmark rating, Financial Times, 29 January 2015.
See also:
20. Deloitte analysis
21. Exchange rate correct as of 1 March 2016, mid-price, OANDA historical currency converter (£1 = €)
22. Liberum AltFi Volume Index Continental Europe, AltFi Data, accessed 10 March 2016.
See also:
23. Opinion of the European Banking Authority on lending-based crowdfunding, European Banking Authority, 26 February 2015, pp. 36-37.
See also:
24. Prêt d’Union Ready for European Expansion With €31 Million of New Funding, Let’s Talk Payments, 3 July 2015.
See also:
25. Funding Circle launches across Europe with deal for Rocket Internet-backed Zencap, Funding Circle, 20 October 2015.
See also:
26. Unique Platform-Bank Alliance Forms, AltFi Data, 13 May 2015.
See also:
27. Aegon Invests €150 million through Auxmoney, AltFi Data, 20 October 2015.
See also:
28. Trust Buddy website, accessed 25 February 2016. See also:
A
p
p
en
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37Marketplace lending | A temporary phenomenon?
29. TrustBuddy Loses Trust, Crowdfund Insider, 13 October 2015. See also:
trustbuddy-loses-trust-peer-to-peer-platform-closes-following-suspected-misconduct-swedish-police-contacted/
30. Tight bank lending, lush bond market, Deutsche Bank Research, 15 April 2014, . See also:
PROD/DBR_INTERNET_EN-PROD/;RWSESSIONID=85E223C348274613A547D113BAE542ED.
srv-tc1-dbr-com
31. Aggregate P2PFA member data, 4th Quarter 2015, P2PFA, 2015. See also:
32. Direct Lending: Finding value/minimising risk, Liberum, 20 October 2015, .
See also:
33. The Deloitte UK Retail Banking Insight Team developed a UK MPL opportunity-assessment model. There were three main
components to this. Firstly, we examined the costs incurred in the current credit environment in originating and servicing loans
through a stylised traditional bank and compared these to the costs incurred in originating and servicing equivalent loans through
a simulated MPL. In doing so we determined if MPLs have any intrinsic cost advantage that will enable them to price more
competitively than banks. Secondly, we repeated this analysis revising our inputs to reflect a normalised credit environment.
Here we assumed that reference rates (including Libor and the bank rate) increase and that spreads on deposits and wholesale
issuances widen to the levels typically seen prior to the last financial crisis. We then re-examined the costs incurred by the
simulated bank and MPL respectively and determined the extent to which any cost advantages would endure in this situation.
Finally, we combined this analysis with our findings on the non-cost advantages offered by MPLs (principally their enhanced user-
experience in terms of speed and convenience) and determined the extent to which these advantages as a whole would endure
in different future scenarios. Combining this with the outputs of our consumer survey, we were able to estimate the market share
MPLs could feasibly capitalise on across these different scenarios. The underlying data used in compiling this analysis came from
publicly available sources, including the Bank of England, the reports and disclosures made by a range of UK banks and MPLs, as
well as our own proprietary data sources and the Deloitte survey of consumer attitudes to MPLs, conducted with YouGov as the
source research agency.
34. We estimate the non-interest costs of running a deposit book at approximately 310 bps of the total deposits held. Approximately
60% of this is attributable to the costs of the branch network, with the remainder relating to acquisition, processing and servicing
expenses. Furthermore, we assume that in a normally capitalised banking book with sufficient liquidity reserves, total deposits will
equal approximately 87% of total loans. As such, we compute the non-interest costs incurred in attracting and retaining deposits
at approximately 270 bps of the total loans funded by the deposits.
35. Banks and MPLs clearly do incur other operating costs: banks must service their deposits and branch networks, while MPLs must
service their investors. However, we have factored these into the ‘fully-loaded’ costs of attracting funds set out in the previous
section.
36. As part of this research, Deloitte constructed two questionnaires around the awareness, usage and potential future usage of
marketplace lenders – one for consumers and one for SMEs, using YouGov as the source research agency. In collecting the data, a
hybrid model was used. Questions around awareness and potential future usage were asked to a nationally representative sample
of 2,090 consumers and 1,609 senior SME decision-makers. Questions about previous usage were asked to a non-representative
sample group of 4,296 consumers and 1,671 senior SME decision-makers, in order to obtain a statistically relevant sample size.
The objective was to understand the factors driving and inhibiting usage, and the potential for future growth, of MPLs.
37. P2PFA. See also:
38. Price comparison websites start to mature, Financial Times, 8 December 2014.
See also:
39. Top Spenders, Top Keywords in . Paid Search, AdGooroo, 28 October 2014.
See also:
40. Credit card market study: interim report, Financial Conduct Authority, November 2015, .
See also:
41. Retail Banking Market Investigation: Statement of Issues, Competition & Markets Authority, November 2014, .
See also:
42. The FCA’s regulatory approach to crowdfunding (and similar activities), Financial Conduct Authority, October 2013, .
See also:
43. The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other
media, Financial Conduct Authority, March 2014, -22.
See also:
44. The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other
media, Financial Conduct Authority, March 2014, .
See also:
45. The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other
media, Financial Conduct Authority, March 2014, .
See also:
46. The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other
media, Financial Conduct Authority, March 2014, .
See also:
38
47. The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other
media, Financial Conduct Authority, March 2014, .
See also:
48. Governance over mortgage lending strategies, Financial Conduct Authority, March 2015, .
See also:
49. As part of this research Deloitte spoke to several UK marketplace lenders, banks, and investment managers. The objective was to
understand their perspective on developments in lending, and how they felt incumbent banks should respond. We asked these
experts questions about attractiveness of MPLs, advantages and future growth of the model.
50. Private Debt In Europe: Q4 2015, Preqin, October 2015.
See also:
51. Tracking Bond Benchmarks, The Wall Street Journal, accessed 8 March 2016.
See also:
52. Individual Savings Accounts (ISAs) are tax-exempt savings accounts available to individuals in the UK. ISAs can be held in cash or
stocks and shares, and individuals can hold up to £15,420 in ISAs as of the 2015/16 financial year. From 6th April 2016, individuals
are able to receive the same tax benefits from lending through P2P platforms through the Innovative Finance ISA (IFISA) as they
can currently receive through cash and stocks and shares savings/investments.
53. Deloitte analysis
54. See endnote 33
55. Deloitte defines the addressable market as the UK consumer unsecured personal lending market, the UK small and medium-sized
business lending market, and the UK retail buy-to-let market. To estimate the size of the addressable market, Deloitte has taken
data relating to consumer and SME lending published by the Bank of England and applied prudent growth rates to estimate
market size in 2025. In addition, Deloitte has taken data relating to UK retail mortgage lending from the Bank of England and
carved out an amount commensurate with current buy-to-let mortgage lending. Deloitte has then applied prudent growth rates to
arrive at an estimated market size in 2025. In combination, these amounts represent our estimated addressable market.
56. See endnote 33
57. An In Depth Look at the OnDeck/JPMorgan Chase Deal, Lend Academy, 4 December 2015.
See also:
58. Metro Bank strikes deal to lend through P2P site, Financial Times, 19 May 2015.
See also:
59. RBS strikes peer-to-peer alliance, Financial Times, 22 January 2015.
See also:
60. SME finance: help to match SMEs rejected for finance with alternative lenders, HM Treasury, 18 December 2014.
See also:
61. Lending Club, Small . Banks Plan New Consumer-Loan Program, The Wall Street Journal, 9 February 2015.
See also:
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39Marketplace lending | A temporary phenomenon?
Contacts
Neil Tomlinson
Partner, Consulting
Head of UK Banking
+44 20 7303 2333
ntomlinson@
Ian Foottit
Partner, Consulting
Head of UK Financial Services
Strategy
+44 20 7303 4152
ifoottit@
Margaret Doyle
Partner, Insight
Head of UK Financial Services
and Real Estate Insight
+44 20 7007 6311
madoyle@
About the authors
Ian Foottit is a Partner and Head of Financial Services Strategy at Deloitte UK. Margaret Doyle is a Partner and Head of
Financial Services and Real Estate Insight, Cem Turan is a Manager and Head of Retail Banking Insight, and Christopher
Ross is a Senior Retail Banking Analyst at Deloitte UK. Vishwanath Sonnad is a Retail Banking Analyst in the Hyderabad-
based Financial Services Insight team.
The authors would like to thank David Strachan, Rahul Sharma, Roeland Assenberg van Eysden, Craig Harris, Val Srinivas,
Matt Usher, Charles Way, Steve Fromhart, Scott Martin and Deepak Ravichandran for contributing to this report.
40
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